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Pricing: Sample Case Project
Case: Online Broker Services Pricing Course Topic: Price Level (Chapter 6)
Company: Robinhood
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 1
Disclaimer:
• All images such as logos, photos, etc. used in this presentation are the property of their respective copyright owners and are used here for educational purposes only
• Some material adapted from: Nagle et al, “The Strategy and Tactics of Pricing,” 5th Edition
Mini-Case #6D: Forbes: “Forget $10 Trades, Meet Robinhood: New Brokerage Targets Millennials…” http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/
Team 13: Homer Simpson, Bart Simpson, Marge Simpson, Lisa Simpson, Charles Montgomery Burns
Company
Robinhood is an online stock trading platform charging $0 per trade
Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 2
Situation
Success criteria and value: Metric being maximized or minimized:
•Primary: Member growth: 2/2014: 150,000; 5/2014: 330,000+
•Secondary: Provisioning speed (getting users up and running)
Source: GrowthHackers: 5/2014: https://growthhackers.com/slides/robinhood-300k-signups/
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 3
Situation
Overview of industry and its trends: Current events and direction
Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 4
•1.5M active traders who trade 10x/mo
•Dominated by big competitors
•Priced about $5-$10/trade
•Cost about $0.03/trade
•Trend: Dissatisfaction with finance co.
Situation
Overview of top 3+ competitors: Strengths and weaknesses of principals
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 5
Competitor Price Strength Weakness
E-Trade $7.99+ Strong brand $5,000 acct minimum
Schwab $8.95+ Large assets $1,000 acct minimum
Scottrade $7 A bit cheaper $32 for broker assist
TDAmeritrade $9.99 Investment platform $45 for broker assist
Source: Etrade.com: https://us.etrade.com/e/t/prospectestation/pricing?id=1206010000
Source: Schwab.com: http://www.schwab.com/public/schwab/investing/pricing_services/fees_minimums
Source: Scottrade.com: https://www.scottrade.com/online-brokerage/trading-fees-commissions.html
Source: TDAmeritrade: https://www.tdameritrade.com/pricing.page
Situation
Overview of company: Important background and recent developments
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 6
Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/
Source: robinhood.com
•Free stock trading; No $10 fee
•Encrypted for security
•Financial Industry Regulatory
Authority (FINRA)
•Securities Investor Protection
Corporation (SIPC)
•Fast execution
•Real-time quotes
Situation
Current pricing strategy/approach: Pricing methodology and consumer response
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 7
• $0 per trade
• Less than competitors
• Makes money through
interest from margin
accounts and cash
Source: Robinhood.com: https://robinhoodapp.zendesk.com/hc/en-us/articles/203579955-How-is-Robinhood-similar-to-other-online-brokerages-such-as-E-Trade-Schwab-and-Scottrade-
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/
“…Robinhood received overwhelming customer response…”
Forbes, October 2014
Problem
Symptoms: Identification of symptoms present in the company and/or industry
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 8
Millennials saving at -2%: Spending more than they have
•60% of Millennials say they distrust financial markets (CapitalOne)
•Comparison: Workers between 35-44 have savings rate of 3%
Source: CNN Moneyhttp://money.cnn.com/2014/11/10/pf/millennials-negative-savings/
-2%
Problem
Underlying problem: Identification of the underlying problem causing symptoms
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 9
Old Model
• Trading on PC
• Trust in finance
• Baby-boomers
driving economy
• Competition:
Banks, Brokerages
New Model
• Trading on iPhone
• Distrust in finance
• Millennials
driving economy
• Competition:
Robo-Advisors, ETFs
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/
“Great” Recession: 2008 - on
Why are Millennials saving less?
Problem
Decision: Identification of type of decision that needs to be made: new service?
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 10
Obstacle Description
Relationship Interact with broker Interact with iPhone
Location Do trades at home Do trades while mobile
Balances Minimum balance of $5000+ Minimum balance of $0
Fees High fees Low fees or $0 fees
New service that addresses obstacles to saving
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/
Analysis
Thought process: Support of thought process with research from previous sect.
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 11
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/07/25/td-ameritrade-q3-earnings-asset-based-revenues-make-up-for-low-trading-volumes/
Commission-based business Asset-based business
Charge on purchases & sales Charge on assets under management
“Commission” a bad word Reference value of 1% - 2% seems low
Screenshot from Forbes.com
Analysis
Approach Description and Examples
Commission Payment based on % of purchases & sales of equities: ETrade
Strength: Only pay when changes are made
Weaknesses: Possible conflict of interest
Question: What value is represented by the trade?
Online Internet-based purchases and sales of equities
Strength: Cheaper than using broker
Weakness: Lacks insight of broker
Asset-based 1% - 3% fee on assets for ongoing management: RIA Firms
Strength: Reduced conflict of interest
Weakness: Little accountability; No penalty if money lost
Obvious choices: Identification of typical approaches
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 12
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/07/25/td-ameritrade-q3-earnings-asset-based-revenues-make-up-for-low-trading-volumes/
Analysis
Approach Description; Examples
Robo-Advisor Low-fee (0.15%) asset-based management: Betterment
Strength: Benefits of ongoing management without high fees
Weakness: Little/no human insight; Lose when market drops
Free Charge $0 for trades of equities: Robinhood
Strength: Breaks down obstacles to saving
Weakness: Find way to monetize; Little/no human insight
Unexpected choices: Identification of other approaches
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 13
Recommendations
Strategies: General approach to address problem, based on analysis
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 14
Source: Robinhood.com: https://robinhoodapp.zendesk.com/hc/en-us/articles/203579955-How-is-Robinhood-similar-to-other-online-brokerages-such-as-E-Trade-Schwab-and-Scottrade-
Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/
Penetration Pricing Charge $0 for trades
Charge $0 for low account balance
Charge $0 for assets under management
(except for interest on cash)
Recommendations
Element Description
Product/Service Efficient service; Remove humans; Remove storefronts
Price Penetration pricing
Place Apple app store (see screenshot); Android coming soon
Promotion Public relations and article placement in Forbes, etc.
Tactics: Specific actions to implement strategy: product, price, place, promotion
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 15
Source: iitunes.apple.com: https://itunes.apple.com/us/app/robinhood-$0-commission-stock/id938003185?ls=1&mt=8
Recommendations
Resource Description
Time In one year, amassed hundreds of thousands of users
Money Venture backed by Google Ventures, Andreessen Horowitz
Personnel Under-resourced provisioning team
Hundreds of thousands of potential users in backlog
Resource impact: Time and money to execute strategy, eg redesign project
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 16
Recommendations
Criteria Description for Existing Industry
Users Number of users; Bring closer to existing competitors:
ETrade: 2.9M accounts; $200B+ in customer assets
TDAmeritrade: 5.8M accounts; $470B in customer assets
Schwab: 8.8M accounts; $1.95T in customer assets
Age Typical age of investors for traditional vehicles: 35+
Success criteria: Expected change in success criteria, increase users by 20%
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 17
Source: nerdwallet.com: http://www.nerdwallet.com/blog/investing/2013/etrade-vs-td-ameritrade-schwab-compare-online-brokers/
Recommendations
Type Description for Robinhood
Users As of March 2015, 800,000 users on a waitlist
Age Average age: 26, as reported by Robinhood.com
Technology Current: iPhone mobile app; Android mobile app planned
Metric: Recommended metric to measure success, eg # new users
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 18
Source: nerdwallet.com: http://money.cnn.com/2015/03/12/investing/robinhood-app-free-trading-millennials/
Conclusion
Learnings Description
Strengths High user growth
Average age agrees with Millennial target market
Weaknesses Significant backlog; Poorly resourced?
Possible source of dissatisfaction
Opportunities Pull market share away from competitors
Threats Fallout from next market correction
Learnings: Identify what you learned from the case; eg inelastic pricing
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 19
Conclusion
Applications: State how learnings can be applied to other similar situations
© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 20
Applications Description
Pricing Penetration pricing works!
If you need to build a large user base in a hurry
Resources Penetration pricing will bring in many users
Must be ready to service users; Robinhood not ready
Business model Creative way to monetize users
Alternative to commission and asset-based business models
Contingencies Little evidence of contingency planning
Not ready for users; Will they be ready for next recession?